Retirement Expectations vs. Realities

The last of the baby boomers will celebrate the big 5-0 birthday this year. And experts say that after they blow out all their candles, boomers need to take an honest look at their financial situation and establish their financial future.

Known as the generation of opportunity and optimism, many boomers are worried over retirement—and for good reason. A study released by the Employee Benefits Research Institute earlier this week shows that 18% of workers report being “very confident" that they'll have enough money for a comfortable retirement, an increase from 13% in 2013. Thirty-seven percent say they are "somewhat confident" and 24% are "not at all confident." While the numbers are an improvement from last year thanks to Wall Street’s record performance, it’s still low.

A recently-released AARP survey on boomers and their finances reports 36% of workers age 55+ have less than $10,000 in savings and investments, nowhere near the amount they need for financial security after they leave the labor market.

I had a chance to speak with Jane Bryant Quinn, personal finance expert for AARP, and she offered the following tips for boomers to help establish financial wellness:

Boomer: How/why do many boomers’ financial expectations differ from the current reality of their situation?

Quinn: If anything, baby boomers are more cognizant of their financial reality than ever before. While they may not have the flexibility to retire early, they now have to take steps to make sure they can retire at all. They’re generally intending to work longer, which will improve their situation, unless they get fired or get sick and can’t work anymore.

It’s not unusual for people to have to live on less when their paycheck stops. That 43% of boomers in our survey that say they are doing "worse than expected" are probably looking at living on quite a bit less, and they know it.

Boomer: How can boomers in the workforce make better financial decisions?

Quinn: Now that the Affordable Care Act allows Americans to maintain coverage outside of employer-sponsored care, boomers need to identify the most fiscally responsible employment options. Making "better decisions" is not as scary or as confusing as some people think it is. Save more, stay out of consumer debt, don’t try to live larger than your income.

It’s hard for the middle and working classes because their real wages have declined. Automatic savings work well but not everyone has easy access to such a plan.

Another great way to make financial decisions is to really consider the effect your career decisions have on your financial status. If possible, work for a company that offers fiscally-responsible health insurance. We now have the Affordable Care Act because so many companies don’t offer it or because people leave the workforce younger than 65 and, in the past, were charged a much higher rate for coverage, if they could get it at all. Having this act now opens new options to pre-retirees. They can leave a job that offers them health insurance and start their own business, knowing they can still be insured. You don't have to worry that a huge medical debt will wipe you out. With this guarantee, you can rewrite your plans for the second chapter of your life.

Boomer: What types of investments can make retirement savings last longer? Should boomers take risks to increase their wealth or err towards the side of caution?

Quinn: Pre-retirees and young retirees of the boomer generation should be holding at least half their money in widely-diversified stocks, ideally through mutual funds.

Boomers are creating a new life stage, post-retirement and are going to live another 30 years-they have to plan for that entire span. They can hold fixed-income to help them through the first 15 years but only the growth provided by holding stocks long term will get them through the second 15 years.

Quinn: Hands down, the first, second and third biggest regret is not saving enough money. You should be saving the most in your peak earning years as you get closer to retirement -which for many boomers, is right now-rather than spending. One thing to really consider is that if you continue to live beyond your means, your retirement expectations will not be realistic.

Boomer: How can boomers’ better prepare for the last act of their life now?

Quinn: Now is the time for boomers to prepare themselves. We are calling 2014 the "Year of the Boomer" as the last of the baby boomer generation will be turning 50 (those born in 1964). Knowing that, it’s time for them, if they haven’t already, to get a fix on how much income they’re going to have when they retire, including income from savings and investments. Then they need to figure out how to live within that amount.

Overspending early in retirement can lead to the need for sharp cutbacks later. Often, people look at how much they’re going to "need" from their savings, and spend that amount. That’s backward. They should look at how much they can prudently take from savings and investments every year, add it to known income such as Social Security, then create a realistic budget that stays within that amount.

If your savings are half in stocks and half in bonds, the general rule is that you can withdraw 4.5%of that total amount in the first year of retirement. You should raise that amount by the inflation rate every year. As long as you don’t panic and sell when stocks go down, that formula should stretch your nest egg over 30 years.